Exit taxation and the need for co-ordination of Member States' tax policies

In this Communication, the Commission proposes ways for Member States to co-ordinate their rules on exit taxation in order to eliminate discrimination and double taxation. The Communication focuses on capital gains accrued when taxpayers move from one Member State to another before selling their assets or when taxpayers transfer their headquarters or assets to another Member State.

ACT

Communication from the Commission to the Council, the European Parliament and the European Economic and Social Committee - Exit taxation and the need for co-ordination of Member States' tax policies [COM(2006) 825 final - Not published in the Official Journal].

SUMMARY

In the framework of an EU-coordinated approach in the field of direct taxation, the European Commission invites Member States to better coordinate their national rules on exit tax.

Exit taxes are levied by many Member States on accrued capital gains when taxpayers move their residence or transfer individual assets to another Member State. The Communication examines how Member States' exit tax rules on individuals and companies can be made compatible with the requirements of EC law. It also gives guidance on how to make such national rules compatible with each other with a view to removing double taxation or inadvertent non-taxation and preventing abuse and tax base erosion.

Background

Many Member States seek to tax their resident individual and/or corporate taxpayers on capital gains in respect of their assets. In domestic situations, such capital gains will usually be taxed when they are realised, that is when the assets are sold or otherwise disposed of. However, if an individual taxpayer moves to another Member State before selling his assets, his original home state risks losing the right to tax the capital gains which have accrued on those assets. Similarly, if a company transfers its headquarters to another Member State or transfers individual assets to a branch (permanent establishment) in another Member State (or vice versa), the original home state risks the (partial) loss of right to tax the gains which have accrued while the company was resident in its territory. Many Member States have attempted to deal with this issue by taxing such accrued but as yet unrealised capital gains at the moment of transfer of the residence by the taxpayer or of the individual assets to another Member State.

The European Court of Justice has already ruled that immediate taxation of latent capital gains on assets transferred to another Member State infringes the principle of freedom of establishment. Indeed, taxpayers will be discriminated by being subject to immediate taxation in their Member State of origin on capital gains not yet realised if no such taxation occurs in similar domestic situations. The Court has also stated that Member States cannot put a disproportionate burden on the taxpayer, such as by imposing bank guarantees or the obligation to appoint a fiscal representative that would guarantee the payment of the tax when the asset is realised in the new home Member State.

However, EC law does not prevent a Member State from assessing the amount of income on which it wishes to preserve its tax jurisdiction, provided this does not give rise to an immediate tax charge and there are no further conditions attached to such deferral, and due account is taken of any reduction in value of the assets after the transfer. Member States should therefore provide for an unconditional deferral of collection of the tax due until the moment of actual realisation.

Removing remaining tax obstacles

Although granting an unconditional deferral may resolve the immediate difference in treatment between taxpayers who move to another Member State and those who remain in the same Member State, it will not necessarily provide a solution for double taxation or inadvertent non-taxation which may arise due to discrepancies between the different national rules. Double taxation could arise if the exit State calculates the capital gain at the moment of deemed disposal at the time the taxpayer leaves the country and the new State of residence taxes the whole capital gain from the acquisition up to the moment of actual disposal. Similarly, in the case of companies, differing asset valuation methods between Member States can give rise to double taxation or inadvertent non-taxation.

Effective administrative cooperation will be key to ensuring the effective protection of the exit State tax base. The new Member State of residence will need to inform the exit State of any future realisation of the assets.

The Communication expresses the Commission's readiness to assist Member States in developing guidance to remove discrimination and double taxation and, at the same time, prevent inadvertent non-taxation, abuse and tax base erosion.